CER

The Centre for European Reform is a think-tank devoted to making the European Union work better and strengthening its role in the world. The CER is pro-European but not uncritical. We regard European integration as largely beneficial but recognise that in many respects the Union does not work well. We also think that the EU should take on more responsibilities globally, on issues ranging from climate change to security. The CER aims to promote an open, outward-looking and effective European Union.

Articles by CER

In recent years, the European Central Bank’s (ECB) monetary policy has been half of what is necessary, two years late. To get eurozone inflation back to its ‘close to 2 per cent’ target, the ECB needs to be much bolder.
The ECB’s meeting on March 10th is shaping up to be one of its most anticipated. Inflation remains far below target and market expectations of future inflation have hardened at very low levels, indicating that investors have lost confidence in the ECB’s ability to fulfil its mandate. The eurozone’s anaemic economic recovery is faltering, which will put further downward pressure on prices, while the weakening world economy will not provide the external stimulus that the ECB hoped for. The central bank needs to be bold and make it clear it will do everything required to raise inflation. Unfortunately, it is likely to err on side of caution, as it has in the past, damaging eurozone growth prospects and calling into question the sustainability of many member-states’ debt burdens.The eurozone is not alone among developed economies in experiencing a structural growth slowdown in the rate of economic growth or in grappling with excessively low inflation (see Chart 1). But the currency union does have an especially acute structural growth problem: it has only just recovered its pre-crisis size, a far worse performance than other developed economies, including Japan.

Solving the problems of the Schengen area will not stop Europe’s refugee crisis. This is a foreign policy crisis with domestic spill-over; it has to be solved abroad as well as at home.
In January, the European Commission gave Greece three months to improve its border controls, and process refugees and migrants more effectively, or face suspension from the borderless Schengen area. Border controls have been reinstated by six of the 26 Schengen states (Austria, France, Denmark, Germany, Norway and Sweden). Hungary built a fence last year to keep out migrants arriving from Serbia. EU ministers are discussing whether to suspend the Schengen arrangements for up to two years.The EU is looking inwards for solutions to its problems when it should also be looking outwards. The refugee crisis is not merely the consequence of Schengen’s deficiencies. Governments are overwhelmed by the sheer numbers of immigrants, and even with better migration and border security policies they would struggle to control the multitudes making the short voyage from Turkey to the Greek islands. Once refugees make it to Greece’s territorial waters, they become Europe’s problem. There are certainly many economic migrants coming to Europe to seek their fortunes, but the majority of those travelling to the Greek islands and Italy over the past year have been genuine refugees.

David Cameron did better than expected at the marathon Brussels summit. But his package of reforms will sway few voters, so he must now make the case for the EU itself.Once David Cameron had won the May 2015 general election, and announced an EU referendum before the end of 2017, he was always going to find it hard to fulfil his pledge to achieve significant reforms to the Union. The final phase of the British renegotiation proved particularly tortuous. But on the night of February 19th a deal emerged and there will now be a referendum on EU membership on June 23rd. Why did Cameron struggle to win major reforms? What are the most significant changes that he has achieved? And how should he try to win the referendum campaign?The other 27 countries in the club are confronted by huge problems, notably the near-collapse of the borderless Schengen area and the continuation of serious economic problems in much of the eurozone. And then the British came along with a form of blackmail: they said that if they were not given a series of minor, mostly technical reforms, that were either not a priority for other countries or cut against their interests, the UK’s EU referendum could well be lost. This tactic has not exactly endeared Britain to its partners.

Three economic rules mean that Britain would seek to join the EU’s single market if it were not already a member.
Both sides of Britain’s EU debate claim the mantle of free-traders. Pro-Europeans emphasise the potential loss of access to the single market if Britain quits the EU. Outers point to the EU’s declining share of world trade, and the opportunities that might arise from signing free trade agreements with countries outside Europe, without having to find consensus with 27 other states. A central question in the campaign has become: ‘Would Brexit boost or depress Britain’s international trade?’One way to answer the question is to imagine that Britain has no trade agreements with other countries, including the EU. Which countries should be the first port of call for its trade negotiators? Three principles would guide its choice: gravity, comparative advantage, and the ‘dynamic’ gains from trade. Together, they suggest that, if it were developing a trade strategy from scratch, Britain would be straight on the phone to Brussels.
Principle 1: Gravity
In the 1960s, Dutch economist Jan Tinbergen discovered that there was a close analogy between Newtonian physics and trade flows. He was inspired by Isaac Newton’s law of universal gravitation: that the gravitational force between two objects is proportional to their mass and the distance between them.

The UK should not imagine that Chinese President Xi Jinping’s October visit means it now has a ‘special relationship’ with China. The visit was just part of a Chinese charm offensive aimed at the EU. Xi Jinping’s state visit to the UK from October 20th-23rd had every possible element of flattery and friendship. The Chancellor of the Exchequer, George Osborne, said before the visit that the UK was China’s “best partner in the West”. Xi told a joint session of Parliament that China and the UK were becoming “an interdependent community of entwined interests”.China has not, however, singled out the UK for special favours. Chart 1 shows that (even though the UK’s trade with China has increased significantly in recent years) Britain is still far from being China’s most important economic partner in Europe.Chart 1. China’s leading EU trade partners, 2013

China is cultivating many European countries: since September 1st 2015, Chinese leaders have met senior representatives of more than 20 EU member-states, as well as at least four European commissioners. That outstrips the amount of senior contact between the US and its European partners over the same period.

Since Sept 1, #Chinese leaders have met senior representatives of more than 20 #EU member-states

In spite of speculation that the German chancellor’s refugee policies may be her downfall, Merkel’s relatively open and liberal stance on refugees makes it easier for her to respond robustly to the attacks in France through security and foreign policy. For years, Angela Merkel’s personal popularity ratings have been stratospheric and her Christian Democratic bloc (CDU/CSU) has had a robust lead in opinion polls. But during the refugee crisis, Merkel’s relatively open stance has led to her approval ratings dropping to their lowest level since 2011. Meanwhile the increasingly far-right party Alternative für Deutschland (AfD) has gained in popularity. The terrorist attacks in Paris on November 13th have predictably provoked more criticism of Merkel’s refugee policies. But it would be premature to call time on the Merkel era. The combination of her open rhetoric and harsh measures to limit illegal immigration is allowing the CDU/CSU to maintain its hold over the political centre ground. Polling indicates that support for the Christian Democrats is stabilising, as voters faced with a security crisis rally around their leader. Merkel’s position as party leader and chancellor is not in danger. In August, 45 per cent of Germans saw more advantages than disadvantages from immigration.

Western indecision in Syria has allowed Daesh to grow strong, and enabled it to attack Europe. The Western response must be resolute abroad, and subtle at home, if it is to defeat Islamist extremism.Sometimes an event occurs that should create clarity of purpose and lucidity of priorities. The Paris attacks are such an event. The tragedy must galvanise European and international support for a co-ordinated offensive against Daesh. Yet questions remain about how best to deal with terrorism at home.France has seen terrorism’s face before: most recently in January, when Charlie Hebdo and a Jewish supermarket were the targets. But never, in modern times, has the soul of France been so thoroughly penetrated. French president Francois Hollande called the terrorist attacks in Paris on November 13th “an act of war” by Daesh, the so-called ‘Islamic State’ terrorist organisation. And France’s first reaction has been war-like: the French air force launched heavy bombing raids on Raqqa, the headquarters of Daesh in Syria, on November 15th. That may bring some satisfaction, though it will not solve the problem of Islamist terrorism in Europe.Since the start of the campaign against Daesh in September 2014, European governments have believed they could dislodge the ‘Islamic State’ from its sanctuary in Iraq and Syria through airstrikes.

The UK could make both Britons and EU migrants wait four years before having access to in-work benefits, but the ECJ might still rule it illegal.Today, David Cameron gave a speech and sent a letter to Donald Tusk, the European Council president, setting out his EU reform demands. Most of the reforms are not surprising, and compromise is achievable. But Cameron appears to be upping the ante on his key demand that is most difficult to achieve: that immigrants from the EU should be denied in-work benefits, such as tax credits and housing benefit, for four years.
#Cameron appears to be upping the ante on his key demand that is most difficult to achieve #CHspeech

The speech was accompanied by some new statistics claiming that 43 per cent of EU migrants receive a UK benefit in the first four years of residence in the country. The 43 per cent figure is surprisingly high, and is based upon administrative data, which is not available to the general public. By contrast, data from the official, publicly available Labour Force Survey, puts the figure at 21 per cent in the first quarter of 2015. The government has made the decision to continue to push for the four-year demand, despite the fact that it would require treaty change, unless similar measures were applied to Britons.

A quarter of a century after the euro’s conception, the flaws in its design have become apparent. EU leaders have fixed some of them but the euro needs better policies in order to be a successful currency.It is almost 25 years since European finance ministers, meeting in Rome in December 1990, launched an ‘inter-governmental conference’ on Economic and Monetary Union (EMU). Their work emerged a year later as the Treaty of Maastricht, which set out a roadmap for creating what became the euro.
At that time I was a journalist in Brussels, interviewing many of those involved in the conception of the euro. Most of them assumed that the euro would encourage trade and investment across frontiers, thereby deepening the single market and boosting competition. They thought that an independent European Central Bank (ECB) would keep inflation and interest rates low, encouraging investment and job creation. They were also convinced that the euro would strengthen the political bonds between the European nations.The euro has in fact delivered real benefits to some of its members, particularly in northern Europe.

In Sunday’s general election in Poland, voters decisively rejected the previous centre-right coalition government in favour of Law and Justice (PiS) – a party which is socially conservative but economically left-leaning. Its electoral victory is likely to lead to a departure from the country’s consensual style in the EU. Among other things, this could complicate the prospects for agreement on how to deal with the refugee crisis in Europe. It could also threaten the hopes of the British prime minister, David Cameron, for a quick deal on EU reform: Law and Justice may try to use the British renegotiation to unpick what it does not like in the current EU agenda.Law and Justice won almost 38 per cent of the vote; only 24 per cent favoured the status quo and voted for Civic Platform (PO) – the party of European Council president Donald Tusk, which led a coalition government for the last eight years. Law and Justice will have 235 MPs in the 460 seat ‘Sejm’ (the lower chamber of the Polish parliament). This ten-seat majority allows Law and Justice to govern alone. But such a narrow majority could make the government vulnerable to internal squabbles, so the party may well try to persuade individual MPs to swap parties. In the Polish electoral system MPs can change their party allegiance without triggering a by-election.

David Cameron wants national parliaments to have more say in the EU, but other European capitals have little appetite for radical change. He should instead focus on improving existing mechanisms for parliaments to influence draft EU legislation. The British Prime Minister, David Cameron, has been touring European capitals to present his package for reforming the EU. Among other things, he wants a stronger role for national parliaments in the EU, but he has yet to make detailed proposals. Philip Hammond, the foreign secretary, calls this the “scoping stage” during which Cameron is testing Europe’s appetite for reforms.National parliaments can already club together to tell the Commission that a draft EU law is unnecessary if it covers an issue better left to individual member-states to regulate (the ‘subsidiarity principle’). Each national parliament has two votes (one vote per chamber in bicameral parliaments) which it can cast against a Commission proposal. One third of all the votes (or a quarter in relation to justice and home affairs proposals) constitutes a so-called ‘yellow card’; more than half of the votes constitutes an ‘orange card’. The problem is that the Commission can in both cases press on with its proposals.

Europe’s economies welcome the collapse of oil prices. But serious foreign policy problems await if oil remains cheap.When oil prices go up, governments of oil-importing countries worry. But when oil prices go down, there is a sigh of relief. Low oil prices give European economies a boost, but in terms of foreign and security policy, Europe’s neighbourhood faces more instability as oil-producing countries struggle with a fiscal crunch.Between 2005 and 2014 there was an extended period of high oil prices. From 2011 to 2014, Brent oil averaged $107 per barrel. But in mid-2014 prices plummeted. Oversupply – booming US shale oil production in combination with unchanged levels of production in OPEC countries – met falling demand, particularly from a slowing Chinese economy. Supply disruptions, sanctions and conflicts – which removed more than 3 million barrels per day from the market in 2015 – had little effect on the downward trend in oil prices. On October 6, Brent oil was trading at around $52 per barrel.
Source: IMF, EIAThe period of high oil prices had negative consequences. It led to a massive transfer of wealth from Western economies to oil producing ones, which weighed on European recoveries and filled the state coffers of (mostly) less democratic states. Defence spending, repression and corruption increased in the Middle East and Russia.

Catalonia’s elections have caused more problems than they have solved. It is time for both Spain and Catalonia to start a national dialogue to reform Spain’s model of regional government. Otherwise, Catalonia will become Europe’s next crisis.Mariano Rajoy, Spain’s conservative prime minister, comes from Galicia, on the north-western coast. By reputation, Galicians are so vague and elusive that – according to a Spanish joke – if you meet one on a staircase you cannot tell whether he is going up or down. Rajoy’s handling of the Catalonian problem has epitomised this uncertainty. His belief that the problem would simply disappear if he ignored it for long enough has led to a pseudo referendum that broke more things than it fixed. It is now time for him to face an uncomfortable truth; he should start a dialogue on Spain’s model of regional government.The results of Sunday’s elections (with pro-independence parties winning the most seats, but non-secessionist ones having the most votes) have divided Catalonia’s public opinion and made the region virtually ungovernable. In the run up to the election, a heated debate, with threats and ultimatums from both sides, has increased the deep political divisions in Spanish society. Politicians in both camps have sadly succeeded in convincing Europe that Spain and Catalonia are mutually exclusive concepts.

Syria is the origin of many of Europe’s current security problems. Four years after the war there started, the West has no strategy for ending it; but neither does anyone else, including Russia.It is understandable that Western leaders who have failed to end the war in Syria over the last four years should now be clutching at straws. They still need to clutch at the right straws, however. There are more ways to make things worse in Syria (and neighbouring countries) than to make them better. The EU needs to re-examine what it is doing, and have achievable objectives rather than lofty aspirations; and it should understand that all the other players in the conflict have their own objectives, most of which are incompatible with the West’s.As world heads of government meet in New York for the UN General Assembly’s annual session, Europe’s refugee crisis has given the EU a new incentive to search for peace in Syria. Though British prime minister David Cameron was wrong to imply recently that the EU should stop taking in Syrian refugees and instead wait for a peace deal, he is right to think that the flood of refugees from the region cannot be stemmed unless the conflict in Syria ends. The problem is that neither he nor anyone else has a plan for that.

The slowdown in emerging markets leaves the eurozone even more reliant on exports to the US and UK to compensate for its feeble domestic economy. The eurozone is banking on a weak euro and strong global growth to boost exports and inflation and offset the weakness of domestic demand. How likely is this? China might yet avoid a recession, but there is no doubt that it is set for a period of much slower growth. At the same time, pretty much every emerging market is weakening, partly because of their dependence on China, and partly because of sluggish productivity growth. The US Federal Reserve’s decision not to increase official interest rates is welcome: a rise would have prompted further capital outflows from emerging markets. But there is no doubt that the global economy is labouring, and that this poses a threat to the eurozone’s anaemic recovery.The eurozone ran a trade surplus of €125 billion over the first six months of 2015. Over the same period of 2011, it had a deficit of €17 billion. Over the last four years, exports have risen 18 per cent; imports just 2 per cent. The data for net exports (exports minus imports), which measures the impact of foreign trade on economic growth, is striking. Between the first half of 2011 and the first half of 2015, the eurozone economy expanded by 1 per cent. Without rising net exports, it would have shrunk by 1.3 per cent.

Georgia, Moldova and Ukraine signed EU association agreements in 2014, but reforms are now stalling. The EU needs to push the three governments to do more. Europe’s southern neighbourhood is in such a state of chaos, with civil war in Syria and anarchy in Libya driving migrants and refugees onto European shores, that few EU leaders are paying attention to the Eastern neighbourhood. But Europe cannot ignore the challenges and opportunities there. There are limits to what it can do with Armenia, Belarus and Azerbaijan: it should encourage improved relations with the first two; and do its best to respond to repression and corruption in the third. But its priority should be to re-energise reform processes in Georgia, Moldova and Ukraine, in alliance with populations desperate for better governance and an end to crony capitalism.In Armenia, progress in relations with the EU stalled in 2013 when Moscow leant on Yerevan to join the Russian-led Eurasian Economic Union rather than signing an association agreement with the EU. Since then, however, the EU and Armenia have started negotiating a new deal, designed to preserve as much of the draft association agreement as possible. Armenia depends on Russia for its security, but the EU should help it to keep what freedom of manoeuvre it can in foreign policy and trade relations.

Jeremy Corbyn’s rise to the Labour leadership heralds an era of ideological contest that threatens Britain’s membership of the EU – and the United Kingdom itself.When does cosy consensus become groupthink? According to the social psychologist, Irving Janis, it is when the desire for conformity becomes so strong that alternative courses of action are not even considered, let alone taken.Jeremy Corbyn, the uncompromising left-winger who has never held ministerial office, surfed from Labour’s backwaters to party leader on a wave of groupthink. The British left never fully accepted Blair’s Third Way – and his greatest mistake, the Iraq war, provided the pretext for its demonisation of him. Corbynistas disparage the party’s centrists as “red Tories” – a process Janis defined as ‘stereotyping’ opponents as spiteful and biased. The British left has always seen itself as the guardian of political morality, leading to a state of total certainty in which the risks flowing from the group’s decisions – withdrawal from NATO might endanger the country’s security, for example – are reflexively dismissed. And Janis also pointed out that moral certainty encourages excessive optimism: the British left imagines that the surge of Corbyn backers signing up to vote will be replicated in the broader electorate, despite the fact that no leader from Labour’s left has ever won a general election.

Ukraine’s reformist government is achieving results. But vested interests are blocking many key reforms, and corruption remains a major problem. Mikheil Saakashvili, the controversial governor of Odessa, is dividing the reformers in Kyiv, as I discovered on my recent visit.Ukraine’s pro-EU, pro-reform coalition has made real progress since taking office nearly a year ago. The current lull in fighting in the Donbass makes it easier for the government to work on reform. So does slightly better economic news: the government has struck a deal with its creditors to reschedule debt, while the economy may soon stop shrinking.But the obstacles to reform remain huge, as became evident during a recent trip to Kyiv which included the Yalta European Strategy conference (YES is an annual event which can no longer take place in Russian-occupied Yalta). The problems include corruption, the erosion of public support for the reformers, the government’s political weakness and the excessively centralised nature of Ukraine’s state. And now the ambitions of Mikheil Saakashvili – once the reforming president of Georgia, now the reforming governor of Ukraine’s Odessa region – threaten to destabilise the political system.

The forces driving refugees towards the EU will not disappear in the foreseeable future. Europe needs a comprehensive long-term strategy to improve the political and security situation in its neighbourhood. And whatever else it does, it needs to take urgent steps to accommodate and integrate refugees already in Europe. The European Commission is on the right track and the member-states should follow its lead.The response of European leaders to the scale and urgency of the refugee crisis has been inadequate. Stronger fences have not stopped migrants at Calais from regularly disrupting train services to the UK; or those in Serbia from walking along train tracks into Hungary. People still climb on board rickety boats along the Turkish and Libyan coasts. Germany’s interior minister, Thomas de Maizière, has suggested that the Schengen agreement could be suspended, allowing EU member-states to reimpose border controls between them – but that would only leave even greater numbers of refugees stuck in ‘frontline’ EU states like Greece.David Cameron, the British prime minister, has said that the solution lies in stabilising countries of origin and “trying to make sure there are worthwhile jobs and stronger economies there”. Of course.

Greece’s debt burden needs to be reduced, but maturity extensions on existing loans are not enough for Greece to return to the markets.The IMF says that Greece’s debt burden is unsustainable. That is why the IMF will not contribute to the third assistance package (recently agreed by Europe and Greece) unless Greek debt is reduced. The problem is that an outright cut in the value of the debt – a haircut – is politically unacceptable, especially to Germany. The other option – extending the maturity of existing official loans further and lowering interest payments – is not enough for Greece to return to the markets. In order for this to be possible, the eurozone needs to refrain from threats of Grexit in case of a renewed crisis; to commit to making Greek debt sustainable even if economic growth comes in below expectations; and to make new government bonds issued to the market senior to existing official loans, such that new government bonds are serviced before official debt. These measures would also be in the interest of the creditors themselves: only if investors, businesses and consumers feel confident about Greece’s euro membership, can Greece grow and repay its debt.Greece’s public debt will reach 200 per cent of GDP next year, according to the European Commission.

David Cameron aims to get a quick agreement on the EU’s reform agenda but parliamentary elections in Poland on 25 October may complicate his plans. Although Law and Justice, the party leading in the opinion polls, belongs to the same political group as the Tories in the European Parliament, it may prove a tough negotiating partner in the European Council.Soon after his election victory in May, British prime minister David Cameron toured Europe to discuss his plans to renegotiate the UK’s relationship with the EU. By making Warsaw one of the first stops on his trip Cameron hoped to improve relations with Poland, which deteriorated as his anti-migration rhetoric hardened. During his first term as prime minister, Cameron did not visit Warsaw at all.But Cameron’s first meeting with prime minister Ewa Kopacz in Warsaw may well have been his last. The Civic Platform, which she runs and which has been in power for the last eight years (in coalition with the Polish Peasant Party), lost the presidential election on 24 May to the right-wing Law and Justice party. The victory of Andrzej Duda, who was sworn in on 6 August, has helped Law and Justice to catch the wind: it is now leading in the public opinion polls ahead of the October’s parliamentary elections, and stands a very good chance of winning them.